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Tax Changes, Education Investments Paying Off for California and Minnesota

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California and Minnesota have enacted a number of the items on our newly updated fiscal policy agenda for building stronger state economies. The results? Both states have improved their education systems — thereby boosting their future prospects — while maintaining strong economic growth.

California voters in 2012 raised income tax rates for the wealthiest residents, as well as the state’s sales tax, and dedicated the new revenue to education, which the state had cut deeply after the recession hit. Those changes helped California raise K-12 funding per student by $1,800, as of last year, and better target those dollars to communities with the greatest need, likely improving the state’s workforce down the road.

Minnesota in 2013 similarly raised income tax rates for its wealthiest residents, enabling the state to make a number of promising investments in education. These include providing full-day kindergarten in all public school districts, helping more low-income children afford preschool programs, and offering college scholarships to more low- and middle-income residents.

Both states have also taken steps to broaden the economic recovery for struggling families. For example, California created an earned income tax credit in 2015 and Minnesota expanded its credit in 2014.

Opponents often claim that raising income taxes on the wealthy will hurt a state’s economy, but both California and Minnesota are doing fine. Since raising taxes, in fact, both state economies have grown faster than the nation as a whole (see chart.)

The fact that raising income taxes on the wealthy hasn’t sunk the California and Minnesota economies should come as no surprise. As we’ve written, state income tax levels have very little to do with state economic growth rates. Focused income tax increases can provide revenue to improve schools and other public services that form a strong foundation for economic growth.